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Citigroup Inc. (C), Exxon Mobil Corporation (XOM): The Shocking Implications Of The Rebuke Of Peak Oil Theory

Peak oil theory has gained widespread recognition at various points over the past several decades, usually during times when fears about oil supply shortages have been at their highest.

Citigroup Inc. (C)

The theory, which espouses the very commonsensical view that the world’s crude oil resources are finite, essentially states that at some point in the future, oil production will begin to fall and prices will rise.

The last time peak oil theory regained widespread popularity was back in the early 2000s. But since then, fears of global supply shortages have all but disappeared, as America’s shale oil and gas revolution has radically altered the paradigms of global energy.

And in what is perhaps a sign of the changing times, an entirely different version of peak oil theory has emerged. Unlike the traditional view, which looks at supply side concerns, this new version targets the other side of the equation and forecasts a peak in global oil demand.

Citigroup makes a bold call
In a new research paper entitled “Global Oil Demand Growth – The End Is Nigh,” Citigroup Inc. (NYSE:C)‘s Seth Kleinman argues that the combination of two factors – a shift away from oil and toward natural gas, combined with improving fuel economy – suggests that global oil demand is “approaching a tipping point.”

Kleinman’s view is certainly not a commonly accepted one. Numerous oil market commentators, including widely respected oil and gas companies, have espoused different opinions. For instance, Exxon Mobil Corporation (NYSE:XOM), in its recently released “Energy Outlook to 2040,” forecasts global oil demand to continue growing through 2040, albeit at a more modest pace than in previous decades.

Like Kleinman, the integrated oil major suggests that increased fuel efficiency and the substitution of other transport fuels for oil will lead to slowing global demand growth. But unlike Kleinman, Exxon Mobil Corporation (NYSE:XOM) predicts total oil demand, excluding biofuels, to climb above 105 million barrels per day by 2040.

In contrast, Kleinman envisions a scenario where improving fuel efficiency and the transition toward natural gas lead to a flattening out of oil demand growth in coming years, with global consumption remaining under 92 million barrels per day over the second half of this decade.

Exxon Mobil Corporation (NYSE:XOM)’s view is definitely more in line with mainstream beliefs. But if Kleinman turns out to be right, it will have massive implications for both the global oil market and the global economy over the next couple of decades.

Can natural gas really compete with oil?
The trends of improving fuel efficiency and shifting toward natural gas as a transport fuel are unmistakable, though the future rate of progress on these two fronts is hotly contested.

Already, natural gas as a fuel source has made significant progress among trucking fleets. For instance, Waste Management, Inc. (NYSE:WM) reckons that, over the next five years, some 80% of its new trucks will burn natural gas as opposed to diesel. Among natural gas truck manufacturers, a similar view prevails, with truckmaker Navistar International Corp (NYSE:NAV) projecting that, within a couple of years, a third of all trucks it sells will be powered by natural gas.

The other necessary components of the equation – refueling stations and natural gas engine manufacturers – are also firing on all cylinders. Cummins Inc. (NYSE:CMI) and Westport Innovations recently announced that they are joining forces to provide engines for two of the biggest natural gas transit fleet orders ever filled in North America.

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